In my recent roundup of key concerns in the world of directors’ and officers’ liability, I discussed the COVID-19-related litigation phenomenon, commenting that notwithstanding the lapse of time since the coronavirus’s initial outbreak there would likely be further pandemic-related lawsuits yet to come. As if to confirm the suggestion, last week a shareholder plaintiff filed a COVID-19 related securities class action lawsuit against the actress Jessica Alba’s personal care consumer products company, The Honest Company. A copy of the plaintiff’s complaint can be found here.
The Honest Company sells consumer products such as skin care products, wipes and diapers, and household goods. The company completed an initial public offering in May 2021.
On August 13, 2021, approximately two months after the company completed it IPO, the company issued its first financial report as a public company. The company reported a net loss of $20 million for the second quarter of 2021, compared to a net loss of only $0.4 million for the second quarter of 2020. The company reported that revenue grew only 3% as compared to the second quarter of the year prior, because it was negatively impacted by “an estimated $3.7 million COVID-19 stock-up impact primarily in Diapers and Wipes in the year prior period.”
The company also reported that “Household and Wellness revenue decline 6% from the second quarter of 2020 as consumer and customer demand for sanitization products decreased as consumers became vaccinated and customers managed heavy levels of inventory.”
According to the subsequently filed securities class action lawsuit complaint, the company’s share price declined 28% the day of the company’s financial report, and several days later had declined nearly 43% from the IPO price.
On September 15, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against the Company; certain of its directors and officers; and the Company’s offering underwriters. The complaint purports to be filed on behalf of investors who purchased the company’s securities in or traceable to the company’s May 2021 IPO. The complaint alleges that the defendants violated Sections 11 and 15 of the Securities Act of 1933. The complaint seeks to recover damages on behalf of the class.
The complaint alleges that the company’s IPO Registration Statement was materially false and misleading and omitted “(1) that, prior to the IPO, the Company’s results had been significantly impacted by a multimillion-dollar COVID-19 stock-up for products in the Diapers and Wipes category and Household and Wellness category; (2) that, at the time of the IPO, the Company was experiencing decelerating demand for such products; (3) that, as a result, the Company’s financial results would likely be adversely impacted; and (4) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis.”
By my count, the new lawsuit against The Honest Company is the 35th COVID-19 related securities class action lawsuit to be filed since the initial outbreak of the coronavirus in the U.S. in March 2020. The lawsuit is also the 11th COVID-19-related securities class action lawsuit to be filed in 2021, although it is the first one to be filed since June 2021.
In commenting on the prior COVID-19 related securities suits, I have noted that the lawsuits have tended to fall into one of three categories: those involving companies that experienced coronavirus outbreaks in their facilities (cruise ship lines, private prison systems); those involving companies that claimed to be able to profit from the coronavirus outbreak (virus development companies, diagnostic testing companies); and those involving companies whose operations or finances were disrupted by the pandemic (real estate development companies, hospital companies).
It could be that this latest lawsuit falls in the third category, as its finances were disrupted by changes in consumer purchasing patterns as a result of the pandemic. It could also be argued that this new lawsuit falls in an entirely new category, involving companies that initially profited from the pandemic but whose fortunes declined as the pandemic’s impacts changed over time. Whether or not this new lawsuit belongs in a new category, there are likely to be other securities lawsuits involving companies whose current or future financial results are impacted by the changing circumstances as the pandemic evolves.
The lawsuit has only just been filed and it remains to be seen how it will fare. However, it seems noteworthy to me to observe that in the extensive quotations from the company’s Registration Statement in the complaint there are numerous extensive references to the impact of COVID-19 on the company and possible impacts on the company’s operations and financial results in the future. Among other things, the complaint quotes the following from the Registration Statement:
We believe COVID-19 has been one of the drivers of demand in our Digital channel as consumers have shifted to online shopping amid the pandemic. Additionally, our Household and Wellness product category ahs benefitted from increasing demand for sanitization products…. We may see a decline in the use of online shopping and demand for sanitization products when the COVID-19 pandemic subsides.
Whatever else may be said, it is clear that the Registration Statement disclosed that the pandemic had caused a temporary shift in consumer purchasing patterns that had benefitted the company, and that could results could change as the pandemic evolved.
It probably should go without saying, but there is something ironic about a company that calls itself “Honest” being accused of having made misleading statements…